Spread Trading

This is a discussion on Spread Trading within the First Steps forums, part of the Reception category; I'm just starting out trading not only spreads but stocks in general and I've spent a lot of time doing ...

I'm just starting out trading not only spreads but stocks in general and I've spent a lot of time doing my homework learning about the different financial vehicles available to me. Spreads are still a bit confusing, however.

Basically, it seems like every site that explains what spreads are makes them out to look like they're super-low risk compared to traditional stock but provide the same returns (when compared to the same stock). If that was the case, why wouldn't everyone just do spread trades rather than buying stock outright?

I've seen all the advantages but can't find too much info on disadvantages. The only thing I can come up with is that if a stock were to unexpectedly plummet, you'd be in deep **** since you're trading on margin but that's not common enough that it be the only disadvantage.

I realize I didn't ask a specific question anywhere above so I'm really just looking for opinions and experiences with the ups and downs of spreads over stocks.

In short: with spreadbetting you do not own the underlying; also its leveraged (it costs you less to win/lose); and profits are exempt from tax in the uk. And its more fun.
No doubt I have missed something out.

In short: with spreadbetting you do not own the underlying; also its leveraged (it costs you less to win/lose); and profits are exempt from tax in the uk. And its more fun.
No doubt I have missed something out.

Hi rsh01,
I think the OP is referring to trading spreads - as opposed to spread betting - which is completely different, although the two are often confused!

Ah my apols.
The spread trades I am aware of not particularly well correlated anymore, and one leg can breakout causing all sorts of pain. Finding a good mean reverting spread trade is, from my experience, hard to find. Let me know if you find one!
I am considering trading the HOGO (heating oil / gasoil spread), but I have a feeling I will be spending my time doing TA on each leg separately, so may as well just trade the outright instead!
Oil cal spreads worked well up to last year, then went a bit t1ts up. Its an expensive trade so if your not getting decent rebates you will prob end up scalping back months where liquidity is low. And there are many better markets to scalp. Plus volume is dominated by algos, which can be frustrating to watch.

Thanks for the help but I'm more confused now! What is the difference between spread betting and spread trading?

Hi vashp2029,
I can't really answer your question succinctly I'm afraid as they are two completely different things that just happen to share the word 'spread' in their respective names. Here's an (old) introductory thread on the subject of trading spreads: FAQ: Spreads Trading
This FAQ compares spread betting with CFDs - but there's a lot in there to give you a good insight into spread betting: What are the Pros and Cons of Spread Betting Vs CFDs?
If you're still not clear about spread betting after reading that FAQ, then I suggest you pick any of the spread betting brokers listed here and check out their sites as they all contain comprehensive explanations as to how it works. Keep in mind though that they have a tendency to make it sound simpler - to make money that is - than it actually is!
Tim.

Thanks for the help but I'm more confused now! What is the difference between spread betting and spread trading?

Spreadbetting is a type of gambling which could relate to any market - sports, financials, politics etc and differs from standard bookmakers/brokers in how it charges the customer - which is by the spread between the bid and the offer. Spreadbetting in the uk is tax free, as is gambling through bookmakers. Earnings from trading through a broker will be liable for income tax.

Spread trading is a type of trading, usually entailing the trading of 2 (sub) markets and the spread is defined by taking one from the other (for very vanilla spread trades) eg the spot ftse / dax spread (not a great example of a spread trade) will be ftse - dax = spread and you would enter a long spread trade by buying the ftse and selling the dax looking for a corrrection in your favour.